NEW YORK (AP) — Rarely has it been so profitable to persuade Donald Trump to fail.
Just ask a group of hard-core Wall Street investors, mostly amateurs, who collectively made tens of millions of dollars last month by betting that the stock price of his social media company – Truth Social – would rise despite massive buying Trump loyalists and Wilde will continue to decline with swings that often reflect the candidate’s recent polls, lawsuits and outbursts on Trump Social himself.
Several of those investors interviewed by The Associated Press say their bearish gambles on “put” options and other trading tools are driven less by their personal feelings about the former president (most don’t like him) than by their belief in the dismal underlying financial data driven by a company that made less money last year than the average Wendy’s hamburger franchise.
“This company doesn’t make any money. … It makes no sense,” said advertising executive Elle Stange of Boise, Idaho, who estimates she made $1,300 betting against Trump Media & Technology stocks. “He’s not as great a businessman as he thinks he is. Many of his businesses fail quickly.”
Jeff Cheung, a Seattle-based IT security specialist, says, “It’s guaranteed to go to zero.”
On Friday morning, a month after Trump Media’s initial public offering catapulted the stock to $66.22, it plunged to $38.49. An AP analysis of data from research firms FactSet and S3 Partners shows that investors using puts and “short sales” have made at least $200 million in paper profits so far, excluding put costs, which vary from trade to trade .
Still, amateur traders, most of whom risk no more than a few thousand dollars per share, say the stock is too volatile to declare victory just yet. So now they’re cashing in a little, running other bets, and sneaking a peek at the latest stock moves in the office cubicle, at the kitchen table, or even on the toilet.
There have been many scary moments, including last week when DJT, the ex-president’s initials and stock ticker, rose nearly 40% in two days.
“I don’t know which way the stock is going,” says day trader Richard Persaud of Schenectady, N.Y., as he looks at his iPhone amid the rise. “It’s so incredibly overrated.”
Many who spoke to the AP say there is an added political advantage knowing that their bets helped cut the value of Trump’s 65 percent stake in half. If some of their predictions are correct, they may one day push it to zero, making it impossible for him to pay his large legal bills or finance his Republican presidential campaign.
You still have a long way to go. Trump’s stake is still worth $4 billion.
Typically, investors who bet that a stock will fall will do a lot of homework, especially a bold breed of hedge fund traders called “short sellers.” They pore over financial reports, develop expertise in an industry, talk to competitors and even turn to “forensic accountants” to find hidden weaknesses in the books.
In the case of Trump Media, this is not necessary. The Sarasota, Fla.-based company’s 100-page financial report lays it all out: a deluge of losses, $58 million last year, on a tiny $4 million in revenue from advertising and other sources.
The losses are so great, Trump Media’s auditor wrote in the report, that they “cast significant doubt about the company’s ability to continue as a going concern.”
A short seller’s dream? Or is it a nightmare?
Amateur trader Manny Marotta has two computer screens at home, one for work, the other that displays the movements of DJT stock, where he can estimate how much it is going up or down.
Things weren’t looking so good earlier this week.
The legal writer from suburban Cleveland had made gains of around $4,000 in recent weeks with “put” options. But that morning, the screen showed investors, presumably rich, buying large amounts of DJT shares, driving the stock up again.
“My options are worth less every minute,” says Marotta, adding of DJT: “It’s being manipulated. That’s crazy.”
Waiting for the stock to fall is particularly painful for “short sellers,” who pay a fee to borrow shares of others. The idea is to sell them quickly on a hunch so that they can later buy the same number of them at a much cheaper price before having to return them to the lender. This allows short sellers to pocket the difference minus the fee, which is usually small.
In the case of DJT, the fee is anything but nominal.
At the beginning of this month, it was trading at 565% per year, meaning short sellers had just two months before potential gains would be eaten up by fees even if the stock fell to zero. That’s a rate so far off the charts that only three other stocks have beaten it recently, according to data from Boston University’s Karl Diether and Wharton’s Itamar Drechsler, who studied short selling two decades ago have employed.
Add to that the massive purchases by Trump supporters who see this as a way to support their candidate, and the losses could quickly multiply.
“It’s scary,” says Drechsler, who compares Trump stock buyers to die-hard sports fans. “It’s everything you hope the stock market isn’t.”
Trump Media spokeswoman Shannon Devine said the company was in a “strong financial position,” with $200 million in cash and no debt, and said the AP was “picking on admitted Trump antagonists.”
Another danger for the stock is a “short squeeze”. If the price rises sharply, it could trigger a rush from short sellers who fear they have made a bad bet to immediately return their borrowed shares and cut their losses. And so they start buying stocks to replace the stocks they borrowed and sold, and this buying tends to negatively impact them and drive up the price, which in turn scares off other short sellers who then do the same buy, setting off a vicious cycle of price hikes.
“If DJT starts rising, you’re going to see the mother of all squeezes,” says S3 Partners short-selling expert Ihor Dusaniwsky, who spent three decades at Morgan Stanley helping investors borrow stocks. “This is not for the faint of heart.”
And if that wasn’t enough, there’s one final strange feature of DJT stock that could trigger a price explosion up or down.
“Lock-up” agreements prohibit Trump and other DJT executives from selling their shares until September. This puts the free float, i.e. the number of shares that can be traded daily by others, at a dangerously tiny 29% of the total shares that will one day flood the market. This means that a large buy or sell on any given day that would barely move a typical stock can send DJT soaring or crashing.
The free float is smaller than that of most other notoriously volatile stocks. At their smallest levels, AMC, GameStock and Shake Shack each had more than double the free float.
Cheung, a Seattle trader, sees DJT’s unusual characteristics as a reason to bet against the stock rather than shy away from it. When the lock-up period ends, he predicts, the ex-president will actually sell his shares, which will unsettle the market and cause the price to fall sharply. And even if he doesn’t, other insiders whose lock-up periods are expiring will fear he will and will act quickly to get a good price before it falls.
“The first one that sells out will last the most,” Cheung says. “Everyone will sell.”
Still, he doesn’t want to lose money in the meantime, so Cheung offsets some of his “put” bets by buying “calls.” The latter are also derivatives, but have the opposite effect and pay off when the stock rises. Whether using puts or calls, Cheung hopes to make money on one to more than offset the loss on the other.
If all of this seems too complicated for you, there is a far easier way to make money betting against Trump.
Casino-style offshore betting sites are taking bets on the 2024 election, and some have even declared President Joe Biden the favorite.
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Contact AP’s global investigative team at [email protected] or https://www.ap.org/tips/